Labour’s first major fiscal statement, the Autumn Budget, had a significant impact on various sectors in the UK, especially for businesses considering closing down. One key change announced in the Budget was related to Capital Gains Tax, directly affecting limited company directors looking to wind up their businesses. Jonathan Munnery, an expert in Members’ Voluntary Liquidation at UK Liquidators, sheds light on what this means for directors and the solvent liquidation process.
A solvent liquidation involves closing a solvent limited company, which can pay off its debts as they come due. When deciding to close a solvent company, directors have two main options: company strike off or Members’ Voluntary Liquidation (MVL). A simple test and advice from an insolvency practitioner can help determine the most suitable route. If the company has over £25,000 in retained profits, an MVL may be the best choice for tax-efficiently extracting funds and closing the business. On the other hand, if the company has minimal assets or profits, dissolution may be more appropriate if all debts are settled.
Members’ Voluntary Liquidation (MVL) is a formal procedure for solvent limited companies, overseen by a licensed insolvency practitioner. It is a popular choice for companies with profits, as it allows directors to extract funds with favorable tax treatment. Profit distributions in an MVL are considered as capital gains, resulting in lower tax liability compared to income tax treatment. Additionally, Business Asset Disposal Relief (BADR) can provide further tax benefits if certain conditions are met, incentivizing entrepreneurs to take risks and start businesses.
The Autumn Budget brought changes to Capital Gains Tax and Business Asset Disposal Relief, aiming to maintain a gap between CGT and Income Tax rates to encourage investment in businesses. CGT rates increased for higher rate and basic rate taxpayers, while the rate for BADR-qualifying directors will rise gradually in the coming years. Despite these changes, the tax advantages of an MVL remain attractive for many directors looking to wind up their companies.
To initiate an MVL, a company director must appoint a licensed insolvency practitioner to act as the liquidator. It is crucial to choose a reputable practitioner and avoid lead generation companies posing as insolvency advisers. Once the decision is made to proceed with an MVL, the practitioner will guide the director through settling creditor affairs and commencing the liquidation process.
In summary, the Autumn Budget changes have implications for directors considering solvent liquidations, highlighting the importance of seeking professional advice to navigate the process effectively and tax-efficiently. Directors must carefully evaluate their options and work closely with insolvency practitioners to ensure a smooth closure for their companies.
